Financial trauma: How money trouble can affect mental health (2024)

My parents were teenagers when they had my sister and me, and they both grew up in households where money was tight. My dad’s job at a local defense plant felt like a lifeline from their childhoods to the stability they’d longed for.

But despite his steady income and company-paid healthcare, my parents had never been taught how to budget, and we often lived beyond our means. Then, when I was 15, my dad got laid off. It was catastrophic for our family: My parents worked four jobs between them trying to replace what they’d lost. In many ways, this marked the end of their marriage and our household.

Whether we like it or not, money does make the world go round. Never is this more evident than when you suffer a financial trauma. From being unable to meet basic needs to experiencing a loss that blows everything up, financial stress can happen to anyone at any time—and its impact on your mental health can shape your life for many years to come.

Understanding financial trauma

Financial trauma goes beyond economic hardship. Experts believe there’s an underlying connection between financial distress and trauma that takes a deeper emotional and psychological toll.¹

Thomas Faupl, LMFT, SEP, who specializes in financial therapy, explains it this way: “Simply put, financial trauma is a mind-body response to a highly stressful event impacting our financial well-being that we have difficulty recovering from.”

This type of trauma shows up in different ways, and it can be considered acute or chronic. According to Faupl, acute financial trauma comes on suddenly after an event like job loss, bankruptcy, or unexpected expenses. Chronic financial trauma can result from growing up with little to no socioeconomic power or inheriting the condition from previous generations.

Money trouble is extremely common: In 2023, half of American adults reported that financial stress negatively affected their mental health.² This can extend to self-esteem, relationships, and overall well-being.

The impact of scarcity

A scarcity mindset, sometimes called scarcity trauma, is a chronic form of financial trauma. “Scarcity trauma comes from a lack of financial resources,” Faupl says. “So if you grew up with a single parent who had to work all the time, or in a family living off food stamps, or had a parent who was constantly losing jobs, or if you lived in a marginalized community and there were not enough financial resources to meet the needs of the family, you may have grown up with this mindset.”

It’s worth noting that wealthy people can also experience financial trauma and a scarcity mindset. This type of trauma stems from an unhealthy relationship with money that can cause emotional wounds.

More exploration is needed, but early research shows that people who face adulthood with a scarcity mindset tend to spend more and make worse financial decisions.³

Signs of financial trauma

You may be so focused on the monetary impact of this type of trauma that its effect on your mental health goes unnoticed. If you find yourself reacting in the following ways, Faupl says, there may be something deeper at play.

You neglect your finances. “There could be avoidance and neglect of somebody’s financial life,” says Faupl. “That could mean not paying taxes, not opening mail, or not paying bills.” Our finances require a lot of attention, and ignoring them can have serious consequences.

You often overspend. Everyone splurges now and then, but if you consistently spend too much, Faupl says that may be a sign you’re experiencing trauma. For example, if you put a bunch of purchases on credit cards without thinking about how to resolve that debt, it may indicate that something is off.

You start hoarding. Hoarding disorder is a condition where someone has a hard time getting rid of items they perceive as having future value. This becomes a problem when all that extra stuff starts to take up too much space or interferes with daily life.

In general, if you find yourself reacting to money or objects in a way that feels extreme, you may be suffering from financial trauma. Visit our directoryto find a therapist who can help you figure out what’s going on and how to start healing.

How financial trauma affects mental health

Financial trauma can trigger a range of emotional responses, but stress is one of the most harmful. Constant worry about bills, fear of eviction, or shame associated with money troubles can create a persistent state of stress born of trauma. Everyday stress about money comes and goes, but financial trauma sticks around—and if left untreated, it can keep growing.

In a 2016 study, 23% of Americans (including 35% of Millennials) reported experiencing psychological effects similar to posttraumatic stress disorder (PTSD) due to “acute financial stress.”⁴

“We know that stress is bad for us physically by putting us at greater risk for heart problems,” says Faupl. “But it also creates a physiological response where you’re in a state of hyperarousal, where you’re always alert and anxious—or hypoarousal, meaning you’re always depressed because you feel like the situation is helpless.”

Financial trauma can also cause or worsen the following conditions:

• Anxiety
• Depression
• PTSD
• Shame
• Sadness
• Isolation
• Low self-esteem

Who’s affected the most?

Some populations are more vulnerable to financial trauma than others.

Communities of color
Growing up under systems of oppression can create chronic financial stress, and it’s the foundational reason why Black Americans experience economic insecurity at a higher rate than other groups.⁵ As researcher and activist Chloe McKenzie writes, financial trauma can also be defined as “the response to the cumulative harming of a person’s wealth-building capability caused by events, actions, policies, and cultural messages that inequitably reinforce a person’s socioeconomic condition or positioning.”⁶

Unmarried or single adults
Studies have demonstrated the positive outcomes of social and romantic relationships, but few have focused on the financial burden that comes with living alone.⁷ Thirteen percent of adult renters can’t afford their next rent payment, and having a dual-income household helps reduce that stress.⁸ One study from 2022 showed that the association between financial strain and psychological distress is higher for unmarried people.⁹

Older adults and people with medical vulnerabilities
Medical debt is one of the main contributors to financial stress in America. People with chronic illnesses or physical disabilities rely on health services more often, as do adults age 65 and older. According to recent data, more than half of Americans don’t have the financial means to cover an unexpected $500 medical bill.¹⁰

Can financial trauma be inherited?

We know that generational trauma can be passed down through families and even rewire our brains, and Faupl explains that financial trauma can chart a similar path. “If you grew up with caretakers or parents who were constantly anxious about money, chances are you’re going to be subconsciously anxious as an adult,” he says.

These types of trauma can also go hand in hand: Populations who have endured genocide, slavery, and other major collective traumas are more vulnerable to financial stress and anxiety. For example, says Faupl, a range of generational trauma responses could result for Jewish families from the torture and financial losses their ancestors faced during the Holocaust.

Financial toxicity

“Financial toxicity” describes a series of money-related events that can happen after a medical incident. Following a serious illness or accident, someone can experience lost wages, forced unemployment, and other financial burdens that are associated with negative psychological outcomes.¹¹

Coping with financial trauma

Financial trauma isn’t always easy to spot, especially when it gets passed down. It may be hidden in behaviors that seem like quirks but are rooted in ancestral trauma. Chronic financial trauma like poverty is often downplayed or overlooked. Despite these challenges, there are concrete steps you can take to start healing.

Processing financial trauma requires a two-pronged approach. Caring for your mental health is a crucial part of healing, and building financial literacy can help prevent further economic stress.

Find a therapist

Working with a therapist who specializes in financial trauma can help you understand the connection between your finances and your mental health.

“Money means different things to different people,” Faupl says. “It can mean freedom, security, support, and safety.” On the other hand, he explains, “If you grew up without money and were neglected emotionally, for example, you might transfer that need for emotional connection to money. You might overwork to compensate.”

As a trauma-informed therapist, Faupl tries to uncover what’s happening in the client’s brain after a financial trauma.¹² “I use methods like eye movement desensitization and reprocessing (EMDR) and brainspotting to help process what’s coming up, then I pair that with financial skill building,” he says.¹³

Because financial trauma is not an official diagnosis, many therapists aren’t trained to treat it.¹⁴ However, a trauma-informed therapist can help you work through this challenge—and any mental health professional can help you explore complicated feelings about money. Visit our directoryto find a therapist near you.

Build financial literacy

Another way to process financial trauma is by educating yourself financially—and, if you’re a parent or caregiver, by educating the next generation.

“Working through your own stuff around money is a critical first step. If you’re healthy around money, and you’re communicative and intentional, you’re going to pass that along,” says Faupl. While he acknowledges the biological component of generational trauma, he encourages financial literacy as a step toward breaking that cycle.

Organizations like the Consumer Financial Protection Bureau provide free financial literacy resources to anyone who needs them, and the Federal Deposit Insurance Corporation (FDIC) offers a Money Smart program that includes parent guides for children grouped by age.^{15, 16}

Be proactive about your financial health

Financial trauma can happen at any time, and being prepared can make a world of difference in how you recover. My father’s layoff was devastating not only because of the shock, but because my parents had no plans in place for an event like that. They had no savings, no support, and no idea how to move forward, which deepened the impact of the loss.

Taking concrete steps now to improve your relationship with money will help you build the coping skills to navigate a financial trauma if it happens.